Ever wondered why we haven’t yet experienced the oil and energy shock, despite a war in the West Asia that has now dragged on for over 45 days? One of the world’s most critical energy chokepoints remain blocked, and yet things look largely manageable.
The answer lies in the global oil shipment cycle.
Here’s what we need to understand about oil markets. When a tanker is loaded with crude in the Persian Gulf, it doesn’t arrive at a refinery in Europe, Asia, or America the next day. Oil tankers are big - upto four or five soccer fields, and carry upto 2-3 million barrels of oil. Thus, they are very slow moving, reaching only upto 10-15 knots. Consequently, these vessels can take anywhere from two to six weeks to reach their destination and route.Add to that the time needed for offloading, refining, and distribution, and you’re looking at a lag of six to ten weeks between a supply disruption and the moment it actually hits your fuel pump or your electricity bill.
According to JP Morgan, the last deliveries to Europe were to reach by April 10. The last of the tankers are to reach their destination - US and Australia - soon.
This is why the world has felt surprisingly little pain so far. The tankers that are keeping refineries running right now. They left port when the straits were still open, when insurance rates were still manageable, and when the old shipping contracts were still in effect. The world has essentially been running on a buffer - a floating stockpile of pre-war oil.
But that buffer is nearly exhausted. Those last tankers, the ones dispatched just as the conflict was intensifying, have either just arrived at their destinations or are days away from doing so. Once they are offloaded, the pipeline runs dry. There is no fresh wave of tankers behind them as the Strait of Hormuz, through which roughly 20% of the world’s traded oil passes, remains effectively closed.
The current dual blockade means that new tanker traffic has slowed to a trickle. Shipping companies are repricing risk. Insurance premiums on vessels attempting the route have spiked. Some carriers have rerouted entirely, adding weeks and enormous cost to each voyage. Others have simply stopped sailing until there is clarity.
Thus, the shipment cycle, more or less insulated us, so far, from the immediate shock of this conflict. But as the last of the tankers arrive in Europe, Australia and the US, things may soon change.